volume i chapter volume ii · chapter volume i 1 introduction to federal taxation in canada 2...

Chapter V O L U M E I

1Introduction ToFederal Taxation In Canada

2 Procedures and Administration

3Income Or Loss From An OfficeOr Employment

4Taxable Income and Tax PayableFor Individuals

5Capital Cost Allowances AndCumulative Eligible Capital

6 Income Or Loss From A Business

7 Income From Property

8 Capital Gains And Capital Losses

9Other Income, Other DeductionsAnd Other Issues

10Retirement Savings And OtherSpecial Income Arrangements

The detailed contents of bothVolume I and II follow.

Chapter V O L U M E I I

11Taxable Income and Tax PayableFor Individuals Revisited

12Taxable Income andTax Payable For Corporations

13Taxation ofCorporate Investment Income

14Other Issues InCorporate Taxation

15Corporate Taxation andManagement Decisions

16 Rollovers Under Section 85

17Other Rollovers and Sale Of AnIncorporated Business

18 Partnerships

19 Trusts And Estate Planning

20 International Issues In Taxation

21 GST/HST

CONTENTS

The textbook is published intwo Volumes:

Volume I = Chapters 1 to 10Volume II = Chapters 11 to 21

CHAPTER 1Introduction To Federal Taxation

In Canada

The Canadian Tax System . . . . . . . . . . 1Alternative Tax Bases . . . . . . . . . . 1

Taxable Entities In Canada . . . . . . . . 2

Federal Taxation And The Provinces . . . . 4

Tax Policy Concepts . . . . . . . . . . . . . 5Taxation And Economic Policy . . . . . . . 5

Taxation And Income Levels . . . . . . . 6

Tax Incidence . . . . . . . . . . . . . 8

Tax Expenditures . . . . . . . . . . . . 8

Qualitative Characteristics Of Tax Systems . . 9

Income Tax Reference Materials . . . . . . 10Introduction . . . . . . . . . . . . . 10

The Income Tax Act . . . . . . . . . . 11

Other Income Tax Legislation . . . . . . 14

Other Sources Of Income Tax Information . 16

Liability For Income Tax . . . . . . . . . . 17Charging Provision For Canadian Residents . 17

Charging Provision For Non-Residents . . . 18

Alternative Concepts Of Income . . . . . . 20The Economist’s View . . . . . . . . . 20

The Accountant’s View . . . . . . . . . 20

The Income Tax Act View . . . . . . . . 21

Net Income For Tax Purposes . . . . . . . 21Structure . . . . . . . . . . . . . . . 21

Components . . . . . . . . . . . . . 21

Combining The Components - ITA Section 3 . 23

Loss Carry Overs . . . . . . . . . . . 25

Net Income For Tax Purposes - Example . . 25

Net Income To Taxable Income . . . . . . 27

Principles Of Tax Planning . . . . . . . . . 27Introduction . . . . . . . . . . . . . 27

Tax Avoidance Or Reduction . . . . . . . 27

Tax Deferral . . . . . . . . . . . . . 28

Income Splitting . . . . . . . . . . . . 28

Abbreviations To Be Used . . . . . . . . . 29

Key Terms Used In This Chapter . . . . . 30

References . . . . . . . . . . . . . . . . . 30

Problems For Self Study . . . . . . . . . . 31

Assignment Problems . . . . . . . . . . . 33

CHAPTER 2Procedures And Administration

Administration Of The Department . . . . 37

Returns And Payments - Individuals . . . 38Requirement To File - ITA 150 . . . . . . 38

Due Date For Individual Returns . . . . . 39

Withholdings - ITA 153 . . . . . . . . . 40

Instalment Payments For Individuals - ITA 156 41

Interest . . . . . . . . . . . . . . . 44

Penalties . . . . . . . . . . . . . . . 45

Due Date For Balance Owing - Individuals . 46

Final Returns For Deceased Taxpayers . . . 47

Returns And Payments - Corporations . . . 47Due Date For Corporate Returns - ITA 150 . 47

Filing Alternatives For Corporations . . . . 47

Instalment Payments For Corporations . . . 48

Due Date For Balance Owing - Corporations . 50

Interest And Penalties For Corporations . . . 50

Returns And Payments - Trusts . . . . . . 51

Income Tax Information Returns . . . . . 51

Refunds . . . . . . . . . . . . . . . . . . . 52

Books And Records . . . . . . . . . . . . . 52

Assessments . . . . . . . . . . . . . . . . 52

Adjustments To Income Tax Returns . . . 53

Appeals . . . . . . . . . . . . . . . . . . . 54Consent Form . . . . . . . . . . . . . 54

Informal Request For Adjustments . . . . . 54

Notice Of Objection . . . . . . . . . . 54

Tax Court Of Canada . . . . . . . . . . 56

Federal Court And The Supreme Court Of Canada 57

Tax Evasion, Avoidance And Planning . . . 57Tax Evasion . . . . . . . . . . . . . 57

Tax Avoidance And Tax Planning . . . . . 57

General Anti-Avoidance Rule (GAAR) . . . 58

Reasonable Expectation Of Profit (REOP) . . 60

Collection And Enforcement . . . . . . . . 60

Taxpayer Relief Provisions (Fairness Package) 62


References . . . . . . . . . . . . . . . . . 64

Problems For Self Study . . . . . . . . . . 66


Detailed Table Of Contents For Both Volumes ()

V O L U M E I

CHAPTER 3Income Or Loss From

An Office Or Employment

Employment Income Defined . . . . . . . 71Cash Basis And The Use Of Bonus Arrangements 72

Net Concept . . . . . . . . . . . . . 73

Employee Versus Self-Employed . . . . . . 73Employee Perspective . . . . . . . . . 74

Employer Perspective . . . . . . . . . . 75

Making The Distinction . . . . . . . . . 76

Inclusions - Salaries And Wages . . . . . . 77

Inclusions - Fringe Benefits . . . . . . . . 77Amounts To Be Included In Income - ITA 6(1) 77

CRA Administrative Practice On Fringe Benefits(IT-470R) . . . . . . . . . . . . . . 78

Tax Planning Considerations . . . . . . . 82

Inclusions - GST/HST/PSTOn Taxable Benefits . . . . . . . . . . . 84

Inclusions - Board And Lodging . . . . . . 85

Inclusions - Automobile Benefits . . . . . 85Employees And Automobiles . . . . . . . 85

Taxable Benefits - Standby Charge . . . . . 86

Operating Cost Benefit . . . . . . . . . 89

Payments By Employee For Automobile Use . 90

Example - Employer Owned Automobile . . 90

Example - Employer Leased Vehicle . . . . 91

Employer Provided Cars And Tax Planning . 92

Inclusions - Allowances . . . . . . . . . . 93Allowance Vs. Reimbursement . . . . . . 93

General Rules . . . . . . . . . . . . . 93

Taxable Vs. Non-Taxable Allowances . . . . 94

Reasonable Allowances For Motor Vehicles . 94

Employer’s Perspective Of Allowances . . . 95

Employee’s Perspective Of Allowances . . . 96

Inclusions - Employee Insurance Benefits . 96Life Insurance . . . . . . . . . . . . . 96

Disability Insurance (a.k.a. Group SicknessOr Accident Insurance Plan) . . . . . . 96

Health Care Insurance . . . . . . . . . 98

Loans To Employees . . . . . . . . . . . . 98General Rules . . . . . . . . . . . . . 98

Home Relocation Loans . . . . . . . . 100

Tax Planning For Interest Free Loans . . . 100

(continued)

CHAPTER 3, continuedInclusions - Stock Option Benefits . . . . 102

CCPCs Vs. Public Companies . . . . . . 104

Rules For Public Companies . . . . . . . 105

Rules For CCPCs . . . . . . . . . . . 106

Other Inclusions . . . . . . . . . . . . . 107Payments By Employer To Employee . . . 107

Forgiveness Of Employee Loans . . . . . 107

Housing Loss Reimbursement . . . . . . 108

Discounts On Employer’s Merchandise . . 108

Club Dues And Recreational Facilities . . . 108

Specific Deductions . . . . . . . . . . . . 109Salesperson’s Expenses Under ITA 8(1)(f) . . 110

Travel Expenses And Motor Vehicle Costs . 111

The Salesperson's Dilemma . . . . . . . 111

Automobile And Aircraft Expenses . . . . 113

Home Office Costs For Employees . . . . 113


References . . . . . . . . . . . . . . . . . 114

Problems For Self Study . . . . . . . . . 115


CHAPTER 4Taxable Income And Tax Payable

For Individuals

Introduction . . . . . . . . . . . . . . . . 133

Taxable Income Of Individuals . . . . . . 134Available Deductions . . . . . . . . . 134

Ordering Of Deductions . . . . . . . . 134

Deductions For Payments - ITA 110(1)(f) . . 135

Home Relocation Loan - ITA 110(1)(j) . . . 135

Northern Residents Deductions - ITA 110.7 . 136

Calculation Of Tax Payable . . . . . . . . 136Federal Tax Payable Before Credits . . . . 136

Provincial Tax Payable Before Credits . . . 137

Types Of Income . . . . . . . . . . . 138

Taxes On Income Not Earned In A Province 139

Calculating Tax Credits . . . . . . . . . . 139Federal Amounts . . . . . . . . . . . 139

Provincial Amounts . . . . . . . . . . 139

(continued)


V O L U M E I

CHAPTER 4, continuedPersonal Tax Credits - ITA 118(1) . . . . 140

A Note On The Family Caregiver Amount . 140

Individuals With A Spouse OrCommon-Law Partner . . . . . . . . 140

Individuals Supporting Dependent Person . 142

Child Tax Credit . . . . . . . . . . . 144

Single Persons (Basic Personal Tax Credit) . . 144

Caregiver Tax Credit . . . . . . . . . 144

Infirm Dependant Over 17 Tax Credit . . 145

Interaction:Eligible Dependant Credit Vs. Caregiver

Or Infirm Dependant Over 17 Credits 146Caregiver Vs. Infirm Dependant Over 17 . 147

Other Tax Credits For Individuals . . . . 148Age Tax Credit . . . . . . . . . . . 148

Pension Income Tax Credit . . . . . . . 148

Canada Employment Tax Credit . . . . . 149

Adoption Expenses Tax Credit . . . . . . 149

Public Transit Passes Tax Credit . . . . . 150

Child Fitness Tax Credit AndChildren’s Arts Tax Credit . . . . . . . 151

First Time Home Buyer’s Tax Credit . . . . 152

Volunteer Firefighters Tax Credit . . . . . 152

Charitable Donations Tax Credit . . . . . 152

Medical Expenses Tax Credit . . . . . . 154

Disability Tax Credit . . . . . . . . . . 158

Education Related Tax Credits . . . . . . 160

Employment Insurance (EI) AndCanada Pension Plan (CPP) Tax Credits . . 163

Transfers To Spouse Or Common-Law Partner 164

Political Contributions Tax Credits . . . . 165

Labour Sponsored Funds Tax Credit . . . 166

Refundable Credits . . . . . . . . . . . . 167Refundable GST/HST Credit . . . . . . 167

Working Income Tax Benefit . . . . . . 168

Canada Child Tax Benefit . . . . . . . . 169

Social Benefits Repayment (OAS And EI) . 169

Comprehensive Example . . . . . . . . . 171


References . . . . . . . . . . . . . . . . . 174

Sample Tax Return For Chapter 4 . . . . 175



Tax Software Assignment Problems . . . 189

CHAPTER 5Capital Cost Allowances AndCumulative Eligible Capital

Capital Cost Allowance System . . . . . . 195

Additions To Capital Cost . . . . . . . . . 197Determination Of Amounts . . . . . . . 197

Available For Use Rules . . . . . . . . 199

Segregation Into Classes . . . . . . . . 199

Capital Cost Allowances . . . . . . . . . 200Rates For Commonly Used CCA Classes . . 201

Half-Year Rules (a.k.a. First Year Rules) . . 204

Short Fiscal Periods . . . . . . . . . . 205

Tax Planning Considerations . . . . . . 206

Dispositions Of Depreciable Assets . . . 207Capital Gains . . . . . . . . . . . . 208

Recapture Of Capital Cost Allowance . . . 209

Terminal Losses . . . . . . . . . . . 210

Summary Of Tax Consequences . . . . . 211

CCA Schedule . . . . . . . . . . . . . . . 211

CCA Determination - Special Situations . 212Separate Class Election . . . . . . . . . 212

Cumulative Eligible Capital (CEC) . . . . 214Eligible Capital Expenditures Defined . . . 214

Additions, Amortization, And Dispositions . 214


References . . . . . . . . . . . . . . . . . 219

Appendix - CCA Rates For Selected Assets 220



CHAPTER 6Income Or Loss From A Business

Overview . . . . . . . . . . . . . . . . . 231Classification Of Income . . . . . . . . 232

Business Income Vs. Property Income . . 234Tax Consequences Of Classification . . . . 234

Business Income Defined . . . . . . . . 235

Property Income Defined . . . . . . . . 236

(continued)


V O L U M E I

CHAPTER 6, continuedBusiness Income Vs. Capital Gains . . . . 236

Tax Consequences Of Classification . . . . 236

Capital Gains Defined . . . . . . . . . 237

Criteria For Identifying Capital Gains . . . 237

Business Income And GAAP . . . . . . . 239

Business Income - Inclusions (Revenues) 240Amounts Received And Receivable . . . . 240

Reserves . . . . . . . . . . . . . . 241

Limitations On Deductions FromBusiness And Property Income . . . . 244Specific Limiting Items Under ITA 18 . . . 245

Foreign Media Advertising - ITA 19 And 19.1 250

Provincial Capital And Payroll Taxes . . . 250

Limitations On Deductions From Business,Property, And Employment Income . . 251Reasonableness . . . . . . . . . . . 251

Meals And Entertainment . . . . . . . . 251

“Luxury” Automobile Costs . . . . . . . 252

Automobiles Owned By The Taxpayer . . . 253

Automobile Leasing Costs . . . . . . . 253

Illegal Payments, Fines And Penalties . . . 256

Leasing Property . . . . . . . . . . . 256

Business Income - Specific Deductions . 257Inventory Valuation (Cost Of Sales) . . . . 257

Other Deductions . . . . . . . . . . 258

Reconciliation Schedule . . . . . . . . . 260

Business Income - Example . . . . . . . . 262

Taxation Year . . . . . . . . . . . . . . . 263General Rules . . . . . . . . . . . . 263

Unincorporated Businesses- Non-Calendar Fiscal Year . . . . . . 263

Special Business Income Situations . . . 265Income For Farmers . . . . . . . . . . 265

Professional Income (Billed Basis) . . . . . 267

Sale Of A Business . . . . . . . . . . 267


References . . . . . . . . . . . . . . . . . 269



Tax Software Assignment ProblemFor Chapter 6 . . . . . . . . . . . . . . 291

CHAPTER 7Income From Property

Property Income: General Concept . . . 295

Interest As A Deduction . . . . . . . . . 296The Singleton And Ludco Court Cases . . . 297

IT-533 - “Interest Deductibility” . . . . . 297

Discount And Premium On Issued Debt . . 300

Interest Income . . . . . . . . . . . . . . 302Individuals - Modified Accrual Method . . 303

Discount And Premium On Debt Holdings . 304

Prescribed Debt Obligations . . . . . . . 304

Accrued Interest At Transfer . . . . . . . 305

Payments Based On Production Or Use(Royalties) . . . . . . . . . . . . . . . 306

Rental Income . . . . . . . . . . . . . . . 306Capital Cost Allowances . . . . . . . . 307

Rental Income Example . . . . . . . . 308

Cash Dividends From Taxable CanadianCorporations . . . . . . . . . . . . . . 309The Concept Of Integration . . . . . . . 309

Eligible Vs. Non-Eligible Dividends . . . . 310

Gross Up And Tax Credit Procedures- Non-Eligible Dividends . . . . . . . 311- Eligible Dividends . . . . . . . . . 313

Comparison Of Investment Returns . . . . 317

Income Trusts . . . . . . . . . . . . . . . 318How Do Trusts Work? . . . . . . . . . 318

Investments In Publicly Traded Trusts . . . 318

Specified Investment Flow-Through Trusts . 320

Taxation Of Income Trusts . . . . . . . 321

Mutual Funds . . . . . . . . . . . . . . . 322Distributions . . . . . . . . . . . . . 322

Adjusted Cost Base . . . . . . . . . . 323

Stock And Capital Dividends . . . . . . . 324

Foreign Source Income . . . . . . . . . . 325

Shareholder Benefits . . . . . . . . . . . 326


References . . . . . . . . . . . . . . . . . 328





V O L U M E I

CHAPTER 8Capital Gains And Capital Losses

Economic Background . . . . . . . . . . 343

General Rules . . . . . . . . . . . . . . . 344Capital Gains Defined . . . . . . . . . 345

Dispositions . . . . . . . . . . . . . 345

Proceeds Of Disposition . . . . . . . . 346

Adjusted Cost Base . . . . . . . . . . 347

Calculating The Capital Gain Or Loss . . . 348

Detailed Application Of The Rules . . . . 349Identical Properties . . . . . . . . . . 349

Partial Dispositions . . . . . . . . . . 350

Warranties On Capital Assets . . . . . . 350

Capital Gains Reserves . . . . . . . . . 351

Bad Debts On Sales Of Capital Property . . 353

Special Rule For Sales Of Real Property . . 354

Provisions For Special Assets . . . . . . . 355Principal Residence . . . . . . . . . . 355

Personal Use Property . . . . . . . . . 358

Listed Personal Property . . . . . . . . 358

Gains And Losses On Foreign Currency . . 359

Options . . . . . . . . . . . . . . 361

Deemed Dispositions - Change In Use . . 362Example - Change In Use . . . . . . . . 364

Special Rules For Principal Residences . . . 366

Special Rules For Automobiles . . . . . . 368

Deemed Dispositions -Departures From Canada . . . . . . . 368

Small Business Investments - Deferral . . 369

Replacement Property - Deferral . . . . 371Voluntary And Involuntary Dispositions . . 372

Timing Considerations . . . . . . . . . 372

Application Of ITA 44(1) To Capital Gains . 372

Application Of ITA 13(4) To Recapture . . 373

Combined Application Of ITA 13(4) And 44(1) 374

Capital Gains And Tax Planning . . . . . 377


References . . . . . . . . . . . . . . . . . 378




CHAPTER 9Other Income, Other Deductions,

And Other Issues

Introduction . . . . . . . . . . . . . . . . 399

Other Income - Subdivision d Inclusions 400Pension Benefits . . . . . . . . . . . 400

Retiring Allowances . . . . . . . . . . 401

Death Benefits . . . . . . . . . . . . 401

Income Inclusions From Deferred Income Plans 402

Scholarships And Prizes . . . . . . . . 402

Research Grants . . . . . . . . . . . 403

Social Assistance And Workers’ Compensation 403

Universal Child Care Benefit - ITA 56(6) . . 403

Other Deductions - Subdivision e . . . . 403CPP Contributions On Self-Employed Earnings 403

Moving Expenses . . . . . . . . . . . 404

Child Care Expenses . . . . . . . . . . 407

Disability Supports Deduction . . . . . . 410

Related Inclusions And Deductions . . . 412Employment Insurance Benefits . . . . . 412

Pension Income Splitting . . . . . . . . 413

Spousal And Child Support . . . . . . . 414

Annuity Payments Received . . . . . . 416

Registered Savings Plans . . . . . . . . . 418Registered Education Savings Plans (RESPs) . 419

Registered Disability Savings Plans (RDSPs) . 423

Tax Free Savings Accounts (TFSAs) . . . . 424

Non-Arm’s Length Transfers Of Property 426Inadequate Considerations . . . . . . . 426

Inter Vivos Transfers To A Spouse . . . . 429

Transfers Of Depreciable Assets . . . . . . 431

Farm Or Fishing Property To A Child . . . 433

Death Of A Taxpayer . . . . . . . . . . . 434

Income Attribution . . . . . . . . . . . . 436Basic Rules . . . . . . . . . . . . . 436

Avoiding Income Attribution . . . . . . 438

Tax Planning And Income Attribution . . . 441


References . . . . . . . . . . . . . . . . . 443





V O L U M E I

CHAPTER 10Retirement Savings And OtherSpecial Income Arrangements

Planning For Retirement . . . . . . . . . 463Tax Deferred Savings . . . . . . . . . 464

Defined Benefit Vs. Money Purchase Plans . 466

Registered Retirement Savings Plans (RRSPs) 467RRSP Deduction Limit . . . . . . . . . 469

Examples Of RRSP Deduction Calculations . 476

Undeducted RRSP Contributions . . . . . 478

RRSP And RRIF Administration Fees . . . . 480

RRSP Withdrawals And Voluntary Conversions 480

Involuntary Termination Due To Age . . . 481

Spousal RRSP . . . . . . . . . . . . 481

Home Buyers’ Plan (HBP) . . . . . . . 483

Lifelong Learning Plan (LLP) . . . . . . . 485

Departure From Canada . . . . . . . . 486

Death Of The Registrant . . . . . . . . 487

Registered Pension Plans (RPPs) . . . . . 489Employer Contributions To The RPP . . . 489

Employee Contributions To The RPP . . . 490

Options At Retirement . . . . . . . . . 490

Phased Retirement . . . . . . . . . . 490

Pooled Registered Pension Plans (PRPPs) . . 491

Registered Retirement Income Funds (RRIFs) 492RRIF Withdrawals . . . . . . . . . . . 492

Death Of The Registrant . . . . . . . . 493

Evaluation Of RRIFs . . . . . . . . . . 494

Deferred Profit Sharing Plans . . . . . . . 494

Profit Sharing Plans . . . . . . . . . . . . 495

Transfers Between Plans . . . . . . . . . 495Retiring Allowances . . . . . . . . . . 496

Retirement Compensation Arrangements 497Arrangements Defined . . . . . . . . . 497

Part XI.3 Refundable Tax . . . . . . . . 497

Salary Deferral Arrangements . . . . . . 498


References . . . . . . . . . . . . . . . . . 500



Tax Software Assignment ProblemFor Chapter 10 . . . . . . . . . . . . . 516


V O L U M E I

The preceding Table of Contentsfor Chapters 1 to 10 is in finalform.

The remainder of this Table ofContents is in draft form. In thefinal version of the book, thesubject matter of each Chapterand the coverage will be verysimilar to what follows.

Note that the textbook ispublished in two Volumes:

Volume I = Chapters 1 to 10

Volume II = Chapters 11 to 21

CHAPTER 11 (Draft)

Taxable Income And Tax PayableFor Individuals Revisited

Introduction

Taxable Income Overview

Lump-Sum PaymentsThe Problem

Treatment Of LossesCarry Over Provisions

Personal Use Property Losses

Listed Personal Property Losses

Non-Capital Losses

Net Capital Losses

Net Capital Losses At Death

Allowable Business Investment Losses

Farm Losses

Lifetime Capital Gains DeductionBackground

Qualified Property

Determining The Deductible Amount

Comprehensive Example

Ordering Of Deductions And LossesSignificance Of Ordering

Ordering In Computing Net Income For Tax Purposes

Ordering In Computing Taxable Income

Example

Tax Payable OverviewBasic Federal Tax Payable

Tax On Split IncomeThe Problem

The Solution - The “Kiddie Tax”

Tax Credits RevisitedTransfer Of Dividends To A Spouse Or

Common-Law Partner

Charitable Donations Credit Revisited

Foreign Tax Credits Revisited

Alternative Minimum TaxGeneral Concept

Minimum Tax Calculation

Tax Credits For AMT

AMT Carry Forward

Sample Comprehensive Personal Tax Return

CHAPTER 12 (Draft)Taxable Income And Tax Payable

For Corporations

Computation Of Net Income

Computation Of Taxable IncomeDeductions Available To Corporations

Dividends From Other Corporations

Non-Capital Loss Carry Over For A Corporation

Ordering Of Taxable Income Deductions

Geographical Allocation Of IncomePermanent Establishments

Activity At Permanent Establishments

Example - Permanent Establishments

Federal Tax PayableFederal Tax Abatement

General Rate Reduction

Provincial Tax PayableGeneral Rules

General Rate

Manufacturing And Processing Rate

Small Business Rate

Investment Income Rates

Other Goals Of The Corporate Tax System

Small Business DeductionCanadian Controlled Private Corporation (CCPC)

Active Business Income

Annual Business Limit

Allocation Among Associated Companies

Calculating The Small Business Deduction

Elimination Of Small Business Deduction ForLarge CCPCs

Personal Services Corporations

Professional Corporations And ManagementCompanies

Manufacturing And Processing Profits DeductionCalculating The Deduction

Eligibility

M&P Profits Defined

General Rate Reduction - ITA 123.4(2)Approach To Rate Reductions

Full Rate Taxable Income

Application To Companies Other Than CCPCs

Application To CCPCs

Foreign Tax Credits For CorporationsCalculation Of Foreign Tax Credits


V O L U M E I I

CHAPTER 13 (Draft)Taxation Of

Corporate Investment Income

IntegrationThe Basic Concept

Dividend Gross Up And Tax Credit Procedures

Integration And Business Income

Refundable Taxes On Investment IncomeMeaning Of Aggregate Investment Income

Basic Concepts

Refundable Part I Tax On Investment IncomeAdditional Refundable Tax On Investment Income

(ART)

Problem One: Excessive Tax Rates On TheFlow Through Of A CCPC’s Investment Income

Solution To Problem One:Refundable Portion Of Part I Tax

Refundable Part IV Tax On Dividends ReceivedProblem Two: Use Of Multi-Level Affiliations

To Defer Taxes On Investment Income

Solution To Problem Two:Refundable Part IV Tax

Part IV Tax On Portfolio Dividends Received

Dividends From A Connected Corporation

Dividends Paid Out Of Mixed IncomeOf A Connected Corporation

Other Part IV Tax Considerations

Refundable Dividend Tax On Hand (RDTOH)Basic Concepts

RDTOH - General Definition

Refundable Portion Of Part I Tax Payable

The Dividend Refund

Example

Designation Of Eligible DividendsBasic Concepts

CCPCs And Their GRIP

Non-CCPCs And Their LRIP

Part III.1 Tax On Excessive Eligible DividendDesignations

A Final Word On Eligible Dividends

CHAPTER 14 (Draft)Other Issues In

Corporate Taxation

Introduction

Acquisition Of Control RulesEconomic Background

Acquisition Of Control Legislation

Deemed Year End

Restrictions On The Use Of Charitable Donations

Restrictions On The Use Of Losses

Unrecognized Losses At Deemed Year End

Deemed Disposition Election

Associated CompaniesThe Problem

Investment Tax CreditsBackground

Procedures

Eligible Expenditures

Rates

Refundable Investment Tax Credits

Carry Overs Of Investment Tax Credits

Acquisition Of Control

Tax Basis Shareholders’ EquityShareholders’ Equity Under GAAP

Paid Up Capital (Tax Basis Contributed Capital)

Tax Basis Retained Earnings

Pre-1972 Capital Surplus On Hand (CSOH)

Capital Dividend Account

Distributions Of Corporate SurplusIntroduction

Regular Cash Dividends

Stock Dividends

Dividends In Kind

Capital Dividends Under ITA 83(2)

Deemed Dividends Under ITA 84(1)- Increase In PUC

Deemed Dividends Under ITA 84(2)- On Winding-Up

Deemed Dividends Under ITA 84(3)- On Redemption, Acquisition,Or Cancellation Of Shares

Deemed Dividends Under ITA 84(4) And ITA 84(4.1)


V O L U M E I I

CHAPTER 15 (Draft)Corporate Taxation AndManagement Decisions

The Decision To IncorporateBasic Tax Considerations

Other Advantages And Disadvantages

Tax Reduction And DeferralApproach

Basic Example

Public Corporation

CCPC - Active Business Income

CCPC - Investment Income Other Than Dividends

CCPC - Dividend Income

Conclusions On Tax Reductions And Deferrals

Provincial Taxes And IntegrationIntroduction

Tax Deferral

Tax Reduction

Tax Free DividendsTax Rates On Dividends

Use Of Tax Credits

Tax Free Amounts

Income SplittingBasic Concept

Example

Shareholder BenefitsThe Owner-Manager Environment

Shareholder Benefits Other Than Loans

Shareholder Loans

Management CompensationGeneral Principles

Salary Vs. Dividends

Salary Vs. Dividends For The Owner - ManagerThe Basic Trade-Off

Other Considerations

Conclusion

CHAPTER 16 (Draft)Rollovers Under Section 85

Rollovers Under Section 85Introduction

General Rules For The TransferTransferor And Transferee

Eligible Property

Consideration To Transferor

Making The Election

Establishing The Transfer Price

Transfer Prices - Detailed RulesRules Applicable To All Assets

Accounts Receivable

Inventories And Non-Depreciable Capital Property

Non-Depreciable Capital Property - Disallowed CapitalLosses

Depreciable Property

Depreciable Property - Terminal Losses Disallowed

Eligible Capital Property

Eligible Capital Property - Disallowed Deductions

Allocation Of The Elected ValueConsideration Received By The Transferor

(Shareholder)

Assets Acquired By The Corporation

Paid Up Capital Of Shares IssuedGeneral Rules

Paid Up Capital Reduction

More Than One Class Of Shares

Comprehensive Example - Section 85 Rollovers

Gift To Related Person - Section 85General Rules

Example

Excess Consideration - Section 85Introduction

ITA 15(1) Shareholder Benefit

ITA 84(1) Deemed Dividend

Dividend Stripping - ITA 84.1Background

Applicability Of ITA 84.1

Dividend Stripping Example - Post-1971 Shares

Capital Gains Stripping - ITA 55(2)The Problem

Application Of ITA 55(2)

Capital Gains Stripping - Example One

Capital Gains Stripping - Example Two


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CHAPTER 17 (Draft)Other Rollovers And

Sale Of An Incorporated Business

Introduction

Share For Share ExchangesBackground

Example


Exchange Of Shares In A ReorganizationApplication Of Section 86

Conditions For The Reorganization

Procedures

Example Using ITA 86 In An Estate Freeze

Gift To Related Person (Benefit Rule)

Practical Considerations

Using Section 86 - Advantages and Disadvantages

AmalgamationsThe Nature Of An Amalgamation

Position Of The Amalgamated Company

Position Of The Shareholders

Vertical Amalgamations (Parent And Subsidiary)

Non-Tax Considerations

Tax Planning Considerations

Winding-Up Of A 90 Percent Owned SubsidiaryThe Nature Of A Winding-Up

Acquisition Of Assets

Disposition Of Shares

Tax Planning Considerations - Amalgamation Vs.Winding-Up

Winding-Up Of A Canadian CorporationThe Nature Of The Transaction

Example

Convertible PropertiesApplication


Sale Of An Incorporated BusinessAlternatives

Restrictive Covenants (a.k.a. Non-CompetitionAgreements)

Sale Of Individual Assets

Sale Of Assets As A Going Concern

Sale Of Shares

Evaluation Of Alternatives

Example

CHAPTER 18 (Draft)Partnerships

IntroductionTaxable Entities In Canada

Chapter Coverage

Partnerships DefinedThe Importance Of Defining A Partnership

Basic Partnership Elements

Types Of Partnerships

Co-Ownership, Joint Ventures And SyndicatesIntroduction

Co-Ownership

Joint Ventures

Syndicates

Partnership Income, Losses, And Tax CreditsIntroduction

Basic Concepts

Calculating Partnership Income Or Loss

Allocations To Partners And Partner ExpensesMethod Of Allocation

Allocation Of Specific Items

The Partnership InterestThe Concept

Acquiring A Partnership Interest

Adjustments To The ACB Of A Partnership Interest

Limited Partnerships And Limited PartnersDefinitions

At-Risk Rules

Transfer Of Property To And From A PartnershipIntroduction

Transfers With No Rollover Provision

Common Partnership Rollovers

Specified Investment Flow Through Partnerships


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CHAPTER 19 (Draft)Trusts And Estate Planning

Basic ConceptsWhat Is A Personal Trust?

Establishing A Trust

Non-Tax Reasons For Using Trusts

Classification Of TrustsPersonal Trusts

Testamentary Vs. Inter Vivos Trusts

Taxation Of TrustsThe Basic Model

Rollovers To A Trust

Rollovers To Capital Beneficiaries

21 Year Deemed Disposition Rule

Net Income For Tax Purposes Of A TrustPreferred Beneficiary Election

Amounts Deemed Not Paid

Amounts Retained For Beneficiary Under 21

Taxable Income Of A Trust

Income Allocations To BeneficiariesDiscretionary And Non-Discretionary Distributions

Flow Through Provisions

Principal Residence Exemption

Tax Payable Of Personal TrustsTaxation Of Testamentary Trusts

Taxation Of Inter Vivos Trusts

Trust Tax And Information Returns

Income AttributionAttribution To Settlor (Reversionary Trust)

Purchase Or Sale Of An Interest In A Trust

Tax PlanningFamily Trusts

Spousal Or Common-Law Partner Trusts

Alter Ego Trusts

Joint Spousal Or Common-Law Partner Trusts

Estate Planning

Estate FreezeObjectives Of An Estate Freeze

Techniques Not Involving Rollovers

Section 86 Share Exchange

Rollover Provisions - Section 85 vs. Section 86

SIFT Partnerships And Trusts

CHAPTER 20 (Draft)International Issues In Taxation

IntroductionSubjects Covered

The Role of International Tax Treaties

ResidenceImportance

Residence Of Individuals

Residence Of Corporations

Residence Of Trusts

Non-Residents Earning Canadian Source IncomeBasic Approaches - Part I Or Part XIII Tax

Canadian Source Employment Income

Carrying on Business in Canada

Dispositions of Taxable Canadian Property

Canadian Source Property Income

The Problem Of Double TaxationSources Of The Problem

Dual Residence

Dual Source

Residence Vs. Citizenship

Residence Vs. Source

Immigration And EmigrationEntering Canada - Immigration

Departures From Canada - Emigration

Unwinding A Deemed Disposition

Short-Term Residents

Emigration And Stock Options

Foreign Source Employment Income

Foreign Source Business Income

Foreign Source Capital Gains

Foreign Source Investment IncomeBasic Concepts

Foreign Investment Reporting Requirements

Non-Resident Entities

Foreign Affiliates

Controlled Foreign Affiliates

Foreign Accrual Property Income (FAPI)

Foreign Affiliate Dividends

Foreign Investment Entities

Dividends From Foreign Non-Affiliated Companies


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CHAPTER 21 (Draft)GST/HST

Transaction Tax Concepts

Liability For GST/HST

Supply CategoriesTaxable And Exempt Supplies

Applying the GST/HST RatePlace Of Supply

Collection And Remittance Of GST/HST

RegistrationWho Must Register

Exemption For Small Suppliers

Input Tax CreditsVendors Of Fully Taxable And Zero-Rated Supplies

Vendors Of Exempt Supplies

Example

Relief For Small BusinessesQuick Method Of Accounting

Small Suppliers Exemption

Simplified Input Tax Credit Method

GST/HST Procedures And AdministrationGST/HST Returns And Payments

Refunds And Rebates

Employee And Partner GST/HST Rebate

Residential Property And New Housing Rebate

Sale Of A Business

Specific Applications

Partnerships And GST

Trusts And GST

GLOSSARYThe Glossary can be found:

• at the back of the separate printedStudy Guide, and

• on the Student CD-ROM within the FITACversion of Canadian Tax Principles.

Supplementary ReadingsThe Supplementary Readings can be found onthe Student CD-ROM.

No. 1 - Application Of The Median Rule

No. 2 - Stock Option Shares Deemed

Not Identical Property

No. 3 - Election For Pre-1982 Residences

No. 4 - Determining M&P Profits

No. 5 - SR & ED Expenditures

No. 6 - Final Returns For Deceased Taxpayers

No. 7 - Business Valuations

No. 8 - Tax Shelters

No. 9 - Transfer Pricing


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